Bounded Rationality

In this post, we discuss the interesting recent paper by Steve Ross,”The Recovery Theorem”, in which a method is proposed to disentangle the risk aversion component from the subjective probability measure from state prices. In particular, a method is proposed to back out the market’s forecast of returns (a distribution over returns) from option prices. Attached is the pdf summary detailing the results.

Due to technical issues on getting our figure and latex to display and compile on wordpress, we will temporarily include a pdf version of this post: CAPM II: Returns & MVF. We hope to resolve this issue and post in our usual format soon.